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Late payments burden on SMEs reaches £40bn

18 August 2014

Late payments burden on SMEs reaches £40bn

Small and medium-sized companies are owed nearly £40bn due to late payments that are potentially threatening their future, research has found.

The debt burden on SMEs has grown to £39.4bn, up from £30bn last year and higher than a previous peak of £37bn in 2012, according to data published by BACS Payment Schemes, the direct debit company.

Larger companies, by contrast, are owed just £6.7bn at any time, making a total late payment debt burden for UK business of £46.1bn.

The level of late payments almost doubled in the five years after the recession. BACS said 60 percent of SMEs were now experiencing late payments, with the average company waiting for £38,186 in overdue payments.

A quarter SMEs said that if the amount it was owed grew to £50,000, it would be enough to send it into bankruptcy. The average corporation, by contrast, was owed almost £1m.

The government is legislating in its small business, enterprise and employment bill to force companies to publish information about their payment terms in an effort to shame big businesses into paying suppliers on time.

It also plans to work with the Institute of Credit Management to strengthen the voluntary prompt payment code, which more than 1,500 companies have signed. That could involve an online rating system for late payers.

However, some small business organisations would like it to go further, such as making the code statutory.

Businesses in Scotland and Northern Ireland experienced the highest levels of late payments, with 67 per cent and 66 per cent respectively claiming to have been left waiting for invoices to be paid, according to the research. In England and Wales, the figures stood at 62 per cent and 59 per cent

In terms of business sectors, the BACS research revealed that companies in the manufacturing sector (72 per cent) were most likely to be impacted by overdue payments, followed by those in services (63 per cent) and the transport, retail and distribution sector (48 per cent).

It found that businesses were being forced to bear additional costs of £9.16bn a year because of late payments, with almost a third saying they were spending around £500 a month as a consequence of money owed to them.

This figure could be as high as £10,000 a month as a result of the various costs associated with bad debts, including overdraft fees and administrative costs, with one in four companies spending more than 10 hours a week chasing late payments.

The knock-on effect of late payments meant that a quarter of companies were being forced to pay their own suppliers late, with one in five saying late payments are forcing them to rely on bank overdrafts.

Mike Cherry, national policy chairman at the Federation of Small Businesses, said: “These latest figures are a further reminder of the major headache caused by late payments. Not paying on time and lengthy terms can have a seriously detrimental impact on small firms.

“The prompt payment code needs to have more power and authority to help the smaller firms. For example, ensuring the largest businesses spell out their payment terms. The EU late payment directive is very clear that if payment terms exceed 60 days, they must explain why.”

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